If you’ve ever encountered a statement about a future event that could only be true or false, then you’ve already come across a yes/no proposition. ‘Labour will win the next general election’. ‘My train is going to be late’. ‘Interest rates will go up next year’. All of these are yes/no propositions because they will end up either being right, or wrong.
In the world of finance, digital 100s are essentially bets on whether statements about the future behaviour of a market will be 'true' or 'false'. For example: ‘EUR/USD to be above 11446.1 at 4pm’ or ‘Silver to be below $14.00 per ounce at the close of trading’.
How do digital 100s work?
Assume you were faced with the following proposition: ‘FTSE 100 to be above 6400 at 3pm.’
This will ultimately turn out to be true or false – the FTSE 100 will either be above 6400 at 3pm or it won’t. The probability of it being true, however, will fluctuate according to factors like the volatility of the underlying market and the amount of time left to expiry.
In digital 100 betting, this variation in probability is represented by a price range of 0 to 100. The closer the price of the digital 100 is to 100, the more likely the digital 100 provider thinks the statement in question will be true. The closer it is to zero, the more likely it thinks it will be false.
Bearing this in mind, if the FTSE 100 does indeed end up being above 6400 at 3pm, the statement would be true and the digital 100 would close with the price settling at 100. If on the other hand the FTSE is at 6400 or below at 3pm, the statement would be false and the digital 100 price would settle at 0.
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